AIG's profit rises, despite lower premium volumes

LeslieScism

American International Group Inc. posted a 6.3% increase in net income for the second quarter as it deliberately shrank the amount of insurance sold, part of a strategy to bolster returns and satisfy activist investors.

The global insurance conglomerate also cut costs aggressively to bring down expense ratios in its property-casualty insurance operations in the U.S. and overseas, delivering on another promise from a Jan. 26 strategy update, back when those investors were clamoring for a three-way split of the company.

Still, the company's operating income, which is closely watched by analysts, fell 41%. It was hurt by a sharply higher level of claims for catastrophes, including the Fort McMurray fires in Canada, while interest rates that were lower than in the year-earlier period prompted upward adjustments of some claims reserves.

The per-share operating results, which exclude realized capital gains and losses and some other items considered nonrecurring, beat the consensus expectation of analysts, though they aren't expected to dwell on the upside surprise in the earnings call Wednesday. Instead, they will be trying to gain insight about additional moves by AIG to improve its sluggish stock-market performance.

The results are the first reported since AIG in May added to its board a representative of billionaire activist Carl Icahn and hedge-fund manager John Paulson.

In particular, analysts will be seeking more detail on AIG's promise to return at least $25 billion in share buybacks and dividends through 2017. It is an ambitious goal that is expected to be fulfilled in part from divestitures, including the sale of a stake in AIG's United Guaranty mortgage-insurance unit, possibly through a public offering later this year.

AIG is also open to an outright sale of the unit, people familiar with the matter said.

AIG said it returned $3.2 billion of capital to stockholders in the second quarter, mostly through share buybacks, and had bought $698 million of common stock since the quarter ended, through Aug. 2. That puts its year-to-date return of capital at $7.9 billion.

The board said in a separate release that it would add $3 billion to its stock buyback plan.

AIG reported a 21% decline in a closely watched measure of premium volume in its core business of selling property and casualty insurance to business clients. "Net premiums written" fell to $4.42 billion, from $5.58 billion. The decrease primarily occurred as AIG opted not to renew policies in certain poorly performing product lines, and as the company declined to lower prices for potential buyers even as some rivals have been hotly competing for business.

AIG posted net income of $1.91 billion, or $1.68 a share, up from $1.8 billion, or $1.32 a share, in the year-earlier quarter. The most-recent results included $928 million of gains from the sale of shares in PICC Property & Casualty Co., in China.

Operating income clocked in at $1.11 billion, or 98 cents a share, down from $1.89 billion, or $1.39 a share, in the year-earlier period. Analysts were expecting 93 cents a share.

AIG Chief Executive Peter Hancock said in the earnings release that the results "show strong improvement towards all the goals the board and I announced in January," adding that their confidence "is high" in hitting financial targets set for 2017.

The concept behind the three-way split advocated by Messrs. Icahn and Paulson before they joined the board is that AIG could escape its current designation as a "systemically important" institution by federal regulators, subject to to-be-determined capital and other rules.

Mr. Hancock maintains a split isn't in shareholders' best interests. He promised in the January update to reorganize AIG's property-casualty and life-insurance operations into nine units, more sharply cut costs, return more capital to shareholders and potentially sell any business that underperforms.

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